I. Governor’s January 2010 Budget Proposal

On January 8, 2010, the Governor introduced his 2010-11 Proposed Budget, declared a fiscal emergency, and called a special session of the Legislature. The Department of Finance projected a General Fund (GF) shortfall of approximately $19.9 billion for the two-year period ending June 30, 2011. This represented a current year shortfall of $46.6 billion and an anticipated budget-year shortfall of $12.3 billion while including a $1 billion GF reserve.

Factors that contributed to the increase of the 2010-11 deficit, from the anticipated $6.9 billion when the 2009-10 Budget was enacted, included (1) lower revenue estimated of $3.4 billion, (2) court decisions which have reduced or estimated budget solutions of $4.9 billion, (3) erosion of previous budget solutions of $2 billion, and (4) increased caseload and population growth changes of $1.4 billion in additional costs.

The 2010-11 Proposed Budget provided for approximately $89.3 billion in total revenues, $82.1 billion in expenditures, and a rebuilding of the GF reserve of $1 billion. It was assumed that California was to receive $6.9 billion in federal funds.

Cuts that the Governor wanted to trigger, if federal funds did not come to the State, included (1) eliminating the CalWORKs Welfare-to-Work Program, (2) eliminating the In-Home Supportive Services (IHSS) Program, (3) using Proposition 63 funds to finance mental health, (4) reducing pay to state employees by an additional 5%, (5) eliminating most rehabilitation programs in the Corrections budget, increasing parole agents caseloads and expanding the types of crimes for which time can be served in county jail, (6) eliminating funding for enrollment growth at the California State University (CSU) and University of California (UC) systems, and (7) eliminating funding for transitional housing for foster youth. Some of the tax breaks the Governor wanted eliminated, if federal money did not come in, included (a) extending current suspension of the law allowing a business to apply net operating losses from prior years to reduce current income, (b) extending the current reduction in dependent credits on personal income taxes from $319 per dependent to $102, and (c) retaining the current law to require subsidiaries to have their own tax liability to use research and development and other tax credits.

The Governor proposed $7.5 billion in cuts, even if the federal funds were forthcoming. The cuts included (1) reducing state employee pay by 5%, increasing employee contributions to retirement by 5%, and directing the state departments to make 5% reductions through attrition, (2) limiting services and increase cost sharing in the Medi-Cal program, (3) eliminating vision care coverage and increasing premiums for families with income of 151% to 200% of the federal poverty level under the Healthy Families program, (4) limiting in-home care services to those with the highest need and reducing worker pay to the state minimum wage of $8 per hour, beginning June 1st, (5) starting June 1st, reducing Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants for individuals by $15 a month and eliminating state benefits to legal immigrants not eligible for federal benefits, (6) reducing monthly grants by 15.7% for those who are covered under CalWORKs, reducing child care reimbursements, and eliminating services to legal immigrants not in the United States less than five years, (7) reducing payments to the federal receiver of prison health care, and (8) changing sentencing laws for non-serious, non-felony, and non-sex offenders.

Other proposed changes included (1) eliminating the sales tax on gasoline and increasing the gasoline tax by 10.8 cents per gallon while reducing transportation funding, reducing the guarantee to schools and reducing the cost of consumers, (2) retrofitting red-light cameras to catch speeders and use the revenue to fund courts, (3) reducing the funding for district-level school administrators, (4) funding state parks from oil drilling on the offshore Tranquillon Ridge, (5) requiring a 4.8% surcharge on all residential and commercial insurance policies, (6) asking voters to approve shifting $500 million in Proposition 10 funds to other programs serving children, and (7) requiring the Legislature’s budget to pay $5.4 million for Capitol upkeep.

In the area of K-12 education, the Governor’s Proposed Budget provided a .2% decrease in non-Proposition 98 programs and proposed full funding of the Proposition 98 guarantee. In an effort to protect classroom funding, the budget proposal reduced, by 10%, funding for administration/overhead and other non-instructional related spending by school districts to offset increases in workload. [The reductions that were targeted to school district and county offices of education central administration costs, with the balances coming from program savings and one-time Proposition 98 reversion account funding.] The Governor’s proposal gave school districts flexibility to layoff, assign, reassign, transfer, and rehire teachers based on a school’s skill and subject matter needs instead of teacher seniority. The major beneficiary in the Governor’s January 2010 Proposed Budget was higher education whose budget was increased by $224.5 million or 3.5%. The Governor’s Proposed Budget would have suspended the Cal Grant competitive program. The higher education budget also reflected $1.1 billion for the annualization of the student fee increases approved by the UC Regents and the CSU Trustees for 2009-10, as well as an already 15% fee increase for UC and an additional 10% fee increase for CSU in 2010-11.

The Republicans in the Legislature indicated that they were not going to support any tax increase and the deficit would have to consist of major cuts in governmental programs while Senate Democratic legislative leadership indicated they would not support deep cuts in education or health and human services programs. The Assembly Democrats wanted to make up the deficit through borrowing while the Senate Democrats proposed several new tax options.

II. Governor’s Executive Order S-01-10

On July 8, 2010, Governor Schwarzenegger issued Executive Order S-01-10 which provided for a 5% reduction to state departmental personnel costs. The Order required agencies and departments, under the Governor’s Office, to cap the size and cost of the workforce by 8,915.7 personnel years. Along with this Order, employees will be required to contribute an additional 5% towards their retirement and an across-the-board 5% reduction in salaries which would require collective bargaining and statute changes.

III. Special Session

As previously mentioned, the Governor, also on January 8, 2010, declared a fiscal emergency and called a special session (8th Extraordinary Session) consistent with Proposition 58. Under the State Constitution, the Governor can call the Legislature into a special session to deal with substantial revenue decline or expenditure increase accompanied by proposed legislation to address the fiscal emergency (Proposition 58 authority). If the Legislature fails to pass and send to the Governor, a bill(s) by the 45th day following the proclamation, the Legislature may not work on any other bill. The 45th day of the Special Session was February 22, 2010, which the Legislature met.

The Governor wanted the Legislature to provide approximately $8 billion in reductions which would have cut the deficit down to about $12 billion. The Legislature, on January 11, 2010, convened the 8th Extraordinary Session with the purpose of dealing with the $6.6 billion shortfall in the 2009-10 Budget Act. Legislative hearings were held from January 11th to February 16th to discuss and hear public testimony on the various issues to reduce the Budget. The State Senate made reductions of $5 billion and changes by the State Assembly reduced the solutions by $1 billion. The Governor reduced the solutions by $2.1 billion which made the total GF solutions achieved during this Session at $1.4 billion.

Also addressed in the Session were cash flow concerns in the current fiscal and budget year. Since passage of the cash flow-related legislation in this Session, the State Treasurer was able to sell $2.5 billion in general obligation bonds which were available for transportation, housing, flood protection and school construction.

The following are the bills which were sent to the Governor relative to the budget shortfall:

• AB 1 X8 (Assembly Budget Committee), Chapter 2, Statutes of 2009-10, 8th Extraordinary Session, made changes to shift $3.5 billion (federal funds) from state support within the Department of Public Health to local assistance for expenditures to HIV/AIDS prevention purposes.

• AB 2 X8 (Assembly Budget Committee) recognizes a number of GF savings for the 2010 Budget Act that addresses the fiscal emergency declared by the Governor in the following areas: (1) the Conservatorship and Guardianship Program fees, (2) DNA penalty fee increase, (3) Department of Fish and Game reduction, (4) immigration and customs enforcement commutations, (5) inmate health care cost reductions, (6) Division of Juvenile Justice population reductions, (7) suspension and deferral of non-education mandates, (8) information technology, (9) Governor’s Executive Order S-01-10, (10) delaying pre-payment of other post-employment benefits, and (11) anti-fraud activities in the Medi-Cal program. The Governor vetoed the bill. In his veto message, the Governor stated: “Delaying implementation of the spending reductions I proposed in January will require the Legislature to make even more difficult choices later this year. As the Legislative Analyst has said, ‘Many of the major expenditure reductions in this budget will require significant lead time for departments to implement. Accordingly, the Legislature and the Governor will need to agree to a framework to solve much of the budget problem by the end of March.’ The Legislative Analyst goes on to say that ‘The Governor’s trigger cuts are painful and in some cases draconian. Nevertheless, there is no way the Legislature can avoid making some similarly difficult decisions this year.’ In addition, this bill contains certain savings assumptions that are unrealistic. When I proposed the deportation of undocumented felons last year, I said I would review each case individually and would not commute the sentence of any undocumented felon that had committed serious or violent crime. Based on this review, my January budget includes only $19 million in estimated savings from the commutation and deportation of a select number of undocumented felons, not the $182 million assumed in this legislation. As such, the savings level assumed by this bill will not be achieved.”

• AB 3 X8 (Assembly Budget Committee), Chapter 3, Statutes of 2009-10, 8th Extraordinary Session, permitted a DNA penalty on offenders to cover the costs of the Department of Justice’s DNA laboratories, made technical changes to reimburse the Alcohol and Beverage Control Fund, and provided the Department of Corrections and Rehabilitation (CDCR) with direction on implementing cuts to rehabilitation programs.

• AB 5 X8 (Assembly Budget Committee), Chapter 1, Statutes of 2009-10, 8th Extraordinary Session, permitted various payment deferrals to ensure that the state has adequate cash flow through April of the 2009-10 fiscal year and the entire 2010-11 fiscal year.

• AB 6 X8 (Assembly Budget Committee), Chapter 11, Statutes of 2009-10, 8th Extraordinary Session, and AB 9 X8 (Assembly Budget Committee), Chapter 12, Statutes of 2009-10, 8th Extraordinary Session, approved a modified fuel swap proposal that generates GF relief of $219 million in 2009-10 and $1.6 million in 2010-11, while at the same time improving funding for transit and highways over both the Governor’s proposed and current law. AB 6 X8 exempted the sale of gasoline from the state sales and use tax and raised the gasoline excise tax by up to 17.3 cents. AB 9 X8 appropriated $400 million for transit operations now and at least $350 million in 2011-12, and ongoing. It also provided new money for highways and roads starting with over $400 million in 2011-12.

• AB 7 X8 (Assembly Budget Committee), Chapter 5, Statutes of 2009-10, 8th Extraordinary Session, made various changes to improve the fiscal authority of the Beverage Container Recycling Fund and made changes to allow California to receive additional federal recovery funds for the State Water Pollution Control Revolving Fund.

• AB 10 X8 (Assembly Budget Committee), Chapter 6, Statutes of 2009-10, 8th Extraordinary Session, made changes to the law to allow a portion of tribal gaming revenue to be transferred from transportation debt relief to the GF.

• AB 11 X8 (Assembly Budget Committee), Chapter 7, Statutes of 2009-10, 8th Extraordinary Session, permitted the California Transportation Commission to approve a Letter of No Prejudice for Proposition 116 bonds.

• AB 12 X8 (Assembly Budget Committee), Chapter 8, Statutes of 2009-10, 8th Extraordinary Session, extended the time for ports to complete Proposition 1B bond projects concerning port and maritime security.

• AB 14 X8 (Assembly Budget Committee), Chapter 10, Statutes of 2009-10, 8th Extraordinary Session, made changes to the case deferrals contained in AB 5 X8 above by specifically giving K-12 schools and community colleges more time to apply for a hardship waiver to be exempt from the deferrals, and allowed local governments flexibility to use Proposition 1B funds for cash flow while Highway User Tax account allocations are deferred and clarifies that Highway Users Tax Account deferrals will be taking on a pro rata basis from various allocation sections in statute.

• SB 4 X8 (Senate Budget and Fiscal Review Committee), Chapter 4, Statutes of 2009-10, 8th Extraordinary Session, continued the 3% reduction for provider reimbursement for regional center purchase of services and operations, and expands the eligibility for federal foster care funding.

In the Regular Session, SB 70 (Senate Budget and Fiscal Review Committee), Chapter 9, Statutes of 2010, was enacted as a trailer bill to revise provisions of the fuel swap legislation to recognize special users of fuel, such as purchasers of diesel fuel for rail or other off-road uses. Also, AB 191 (Assembly Budget Committee), Chapter 29, Statutes of 2010, was enacted which clarified the cash flow legislation enacted in the Special Session.

IV. May Revise Budget

In January, the budget deficit was projected at $19.9 billion. The solutions adopted in the Special Session, combined with additional federal funds and administrative actions reduced the size of the problem by $2.1 billion. Revenues estimated in May were $0.6 billion lower. Federal law, court decisions, population and caseload growth, as well as the need for a prudent reserve increased the size of the budget problem by $0.7 billion. With these adjustments, the May Revision projected a budget gap of $19.1 billion which was comprised of a current year shortfall of $10.2 billion and a reserve of $1.2 billion. To close the gap, the Governor’s May Revise proposed various fund shifts, alternative funding, and other revenue accounted for $3.4 billion, federal funds accounted for $5.4 billion, and spending reductions accounted for $12.4 billion.

The Governor’s May Revise proposal (1) continued to fully fund K-12 education (which the legislative conference report took exception to); (2) increased funding for the UC and the California Community Colleges (CCCs); (3) fully funded the Cal Grant program instead of suspending it; (4) withdrew the January proposal to fund the Department of Parks and Recreation Tranquillon Ridge and oil revenues; (5) eliminated the CalWORKs program; (6) reduced the IHSS Program; (7) through a stakeholders process, eliminated GF support for child care and development programs, excluding pre-school; (8) shifted tax funds provided to counties to pay for mental health costs borne by the county to fund state costs in food stamps and child welfare programs; (9) required all state employees to have one unpaid floating furlough day per month; (10) rolled back the elimination of Healthy Families program; (11) reduced corporation taxes by over $2.4 billion by allowing new corporate tax reductions, including net operating loss carryback provisions, the unitary credit sharing provision, and the elective sales factor to all go into effect (the January proposal would have delayed the new tax cuts by one year; (12) maintained the “5/5/5” state employee compensation proposal from the January budget reducing state employee salaries by 5%, increasing state employee pension contributions by 5%, increasing salary savings by 5% to reduce state payrolls); (13) made changes in Medi-Cal including enrolling seniors and people with disabilities in managed care, imposing new co-pay requirements for various services, hospitals stays, and emergency room visits to 10 per year and freezing hospital rates; (14) had non-serious, non-violent, non-sex offenders who are convicted of specified felonies and sentences to three years or less serve their sentence in a county jail instead of state prison; (15) no longer proposed the delaying of several corporate tax breaks that were part of the federal funds triggered in January; (16) withdrew the Governor’s proposal to require that specified offenders receiving felony convictions for “wobbler” crimes be housed in local jails instead of state prison; (17) withdrew the Governor’s January proposal to reduce the age of jurisdiction for the Department of Juvenile Justice from 25 years old to 21 years old; (18) proposed additional GF relief of $1.1 billion from transportation special fund loans; and (19) increased funding to the Governor’s Operation Welcome Home Initiative and other veteran programs to assist returning veterans from Iraq and Afghanistan.

V. Conference Report and Legislative Action

On June 2, 2010, the Senate and the Assembly leadership appointed the following legislative members to the Conference Committee on the Budget (AB 190) to consider the May Revise: Senators Denise Ducheny, Robert Dutton, Mark Leno, Alan Lowenthal, and Bob Huff, and Assemblymembers Bob Blumenfield, Connie Conway, Felipe Fuentes, Jim Nielsen, and Nancy Skinner.

Starting problem (per May Revision) -$17.9 billion


Expenditure reductions $8.3 billion

Federal Funds 4.1 billion

Additional Revenues 2.4 billion

Legislative Analyst revenue forecast (1.4 billion)

Corporate tax break delays/severance tax/tax reform package (4.5 billion)

Tax enforcement measures (0.2 billion)

Adjustment: Proposition 98 (-3.2 billion)

Adjustment: revenues dedicated to Public Safety restructuring (-0.5 billion)

Alternative Funding 1.0 billion

Fund shifts, other 2.7 billion

Total solutions $18.5 billion

Reserve $535 million

Key Highlights

Education – The Conference Committee provided total funding for Proposition 98 education of $52 billion, compared to $49 billion in the Governor’s May Revision. Specifically, the Conference Budget:

• Restored Most Serious Proposed Cuts:

• Restored $1.5 billion for Revenue Limits (the most basic, flexible, funding provided to school) that the Governor proposed to cut.

• Restored $1.4 billion for child care (including $286 million from one-time funds). The Governor had proposed to eliminate funding for child care altogether.

• Restored $300 million for Class Size Reduction. The Governor had proposed to reduce funding by $550 million.

• Restored $230 million that the Governor proposed cut with a “negative COLA”.

• Provided Major Increase in One-Time Funds for Mandate Relief. It provided an additional $1.3 billion to $4 billion of one-time money to schools to pay off past mandate claims and court-ordered settlements. The Conference Budget would have established a statewide local school district joint powers authority (JPA) to enable school districts to accelerate the mandate funds. The exact amount that would be generated would depend on the outcome of court-ordered settlements in several lawsuits filed by school districts on mandate claims. At a minimum, the JPA would have likely generated at least $1.3 billion (the amount owed to school districts for undisputed prior-year mandate claims). This JPA concept is based on the successful JPA used by local governments last year to accelerate the $2 billion in Proposition 1A suspension repayments.

• Suspended Proposition 98 Guarantee with Beneficial Out-Year Impacts. The Conference Budget rejected the Governor’s legally-suspect proposals to manipulate Proposition 98, and rather proposed direct suspension of the guarantee. As the Legislative Analyst’s Office (LAO) has pointed out, suspension of Proposition 98 eliminates any legal or constitutional ambiguity over the $11.2 billion maintenance factor created as part of last year’s budget agreement. Thus, the suspension keeps last year’s budget promises, and enables funding to grow as the economy rebounds to ensure that the state meets the long-term constitutional minimum guarantees established in Proposition 98.

Health and Human Services – The Conference Budget made a number of reductions in health and human services programs, but rejected the Governor’s proposals to eliminate CalWORKs, community mental health programs, Adult Day Health Care, and the near-elimination of IHSS. The Budget also rejected the Governor’s proposals to substantially reduce the ability of those most severely affected by the current recession to access Medi-Cal services.

Public Safety – The Conference Budget assumes approximately $1.1 billion in savings from public safety programs:

• Reduce Prison Health Costs. The Budget would have reduced prison healthcare costs by $820 million, consistent with the Governor’s Proposed Budget savings.

• “Restructures” State-Local Relationship for Certain Criminal Offenders. The Budget would have reduced spending for CDCR by $375 million by realigning state-county responsibility for “wobbler” offenders. Specifically, the Budget shifted responsibility for these offenders to the counties, and provides a new, permanent funding mechanism to pay for the services. Counties would have been able to house and supervise the offenders at the local level if they so chose, or transfer the “wobbler” offenders to state prison and pay for it. This “restructuring” of the state-local relationship will grow over time, eventually saving the state almost $1 billion by 2014. This action takes the place of the Governor’s proposed transfer of non-violent, non-serious criminal offenders to counties.

State Employees – The Conference Budget reduced spending for state employees by approximately $1.5 billion (compared to about $2 billion under the Governor’s proposal), consistent with collective bargaining agreements that have already been reached or are under negotiation.

Federal Funds – The Conference Budget assumed receipt of additional federal funds, consistent with the Governor’s proposal. The amount assumed by the Conference Committee was somewhat higher than the Governor’s level because Conference actions to preserve major health and human services programs will actually result in the state receiving more federal money to reduce our budget deficit.

Revenue – The Conference Budget includes additional revenues from a variety of sources:

• Assumes LAO Revenue Projections. The Conference Budget adopted the LAO revenue projections, which were higher than the Governor’s estimates by $360 million in 2009-10 and $1 billion in 2010-11. The actual figures for 2009-10 were very close to the LAO’s estimates.

• Tax Reform. The Conference Budget adopted a major tax reform proposal that would have raised taxes that are deductible from federal personal income taxes (state personal income tax and vehicle license fee) and reduced the state sales tax that is not deductible on federal personal income tax forms. Under this tax proposal, all income groups would, after deductibility, experience a net tax reduction. The tax reform will have the effect of generating $1.8 billion in additional GF revenue in 2010-11, growing to about $3.3 billion in future years.

• Delays New Corporate Tax Breaks. The Conference Budget delayed, for two years, the start of new business tax breaks scheduled to take effect in 2010-11. Delaying these new tax breaks would preserve about $2.1 billion in GF revenues for 2010-11 that would otherwise be lost.

• Closes Oil Severance Tax Loophole. The Conference Budget would have closed the Oil Severance loophole that will generate $600 million in the budget year, and $1.2 billion ongoing.

There was a stalemate on the Budget in the months of July, August, and September. However, on August 31, 2010, the legislative leadership of both political parties agreed to have a debate on the two budget plans – the Conference Committee proposal and the Governor’s May Revise – in order to discuss and debate the differences. The Senate Republicans took up the Governor’s May Revise by amending AB 1633 (Garrick) and SB 873 (Hollingsworth). There were several differences between the bills and the Governor’s May Revise. The bills did not assume revenues from the red- light cameras for speed enforcement, Emergency Response Initiative, water fees, or AB 32 fees. The bills also made program reductions to CDCR in lieu of the May Revision proposal to shift low-level offenders to local jails. AB 1633 failed passage in the Senate by a vote of 12-24 and SB 873 failed passage in the Assembly by a vote of 25-50. The Democrats who favored the Conference Committee proposal amended the proposal into AB 1609 (Blumenfield) and AB 1636 (Blumenfield). AB 1609 failed passage by a vote of 50-28 in the Assembly and AB 1636 failed passage by a vote of 21-14 in the Senate.

VI. Final Budget

At the end of September 2010, the Big Five met to negotiate on a final budget and on October 8th, after 100 days being late, the Budget was passed by the Legislature.

On October 4th, the State Supreme Court handed down two court decisions concerning the 2009 Budget which had an impact on helping resolve the 2010 Budget solution. The court upheld the power of the Governor to make employees take unpaid leave because the State Legislature gave him that authority when it approved the 2009 Budget Bill. The other decision related to the Governor’s cuts of public social services programs from the 2009 Budget by upholding the Governor’s line-item veto of those cuts.

The Budget approval by the Legislature enacted nearly $18 billion in GF solutions and provided a fund reserve of about $2 billion.

Below is a summary, provided by the Senate Budget and Fiscal Review Committee, of the major highlights contained in the 2010 State Budget:

K-14 Education. Maintained modest increase in education funding on a per-pupil programmatic basis for 2010-11, and began paying “settle-up” payments for the 2009-10 fiscal year with a $300 million payment in 2010-11. The Budget provided ongoing Proposition 98 funding of $49.7 billion and through a new deferral of $1.9 billion and one-time funds brings total state funding for schools and community colleges to $52.5 billion.

Higher Education. Provided $5.5 billion from the General Fund for support of the UC and CSU systems. Funding was above the 2009-10 level and included full funding for enrollment growth and an augmentation of approximately $199 million for each segment to backfill previous cuts to the systems.

Health and Human Services. The Budget made a number of reductions in health and human services programs, but rejected the Governor’s proposals to eliminate CalWORKs, community mental health programs, Adult Day Health Care, and the reductions proposed to the IHSS program. Restores funding vetoed by the Governor from last year’s budget for child welfare services, AIDS prevention, breast cancer screenings, and domestic violence shelters.

Public Safety. The negotiated Budget included Corrections savings of over $1.1 billion from reduced inmate medical care costs ($820 million), cuts from inmate and parole population savings ($200 million), and delayed local assistance payments ($50 million).

State Employees. The Budget package reduced spending for state employees by $1.5 billion. The Legislature’s Budget achieved $896 million in savings by requiring the Administration to reduce departmental appropriations to reflect reductions in employee compensation achieved through the collective bargaining for represented employees and through administrative action to achieve a proportionate reduction for non-represented employees. The Legislature’s Budget achieved $547.7 million in savings through a 5% reduction to departmental personnel costs via Executive Order S-01-10 and by pre-funding other post-employment benefit costs.

Federal Funds. The Budget package assumed new or extended federal funds to provide $5.3 billion in budget solutions.

Fund Shifts and Other Revenues. $2.9 billion in fund shifts including the revenues related to the sale lease-back of the state buildings ($1 billion) authorized in the 2009-10 Budget package and other loans and special fund transfers.

Revenues. The negotiated Budget included $2.5 billion in revenue solutions. More than half of this, $1.4 billion, is from LAO’s revenue forecast, which was $1.4 billion higher than the Governor’s May Revision – three months into the fiscal year, this additional revenue has already been realized. The remainder of the revenue change was from the following: (1) extension of the net operating loss (NOL) suspension: The Budget continued the suspension of the NOL corporate tax benefit for an additional two years, which results in increased tax revenue of about $1.2 billion in 2010-11. Over 90% of all corporations are exempted from this suspension; and (2) corporate underpayment penalties and “cost of performance” rule change. The budget proposal revised recent corporate tax law changes related to penalties assessed when a corporation underpays their tax liability by more than $1 million. The budget proposal also restored the old “cost of performance” rules for the sourcing of intangibles and services related to calculation of multi-state apportionment. These changes will reduce tax revenue by about $132 million in 2010-11.

Pension Reform. Made various changes to state pension laws for new state employees hired on or after November 10, 2010, that will have negligible impact on the state budget. These changes would impact state employees in bargaining units that do not currently have a memorandum of understanding (MOU) with the State, as well as employees of the CSU, the judicial branch of government, and the Legislature. These changes would not apply to current employees.

• Rolls Back SB 400 Pension Benefits for New Employees. All new employees, in state bargaining units that do not currently have an MOU, would be returned to the pension benefit levels that existed prior to the adoption of SB 400 (Ortiz), Chapter 555, Statutes of 1999.

• Ends Pension “Spiking”. Requires three-year final compensation method of calculating benefit levels for new state employees who are not already under this calculation method.

• Transparency. Requires additional analysis and oversight of the California Public Employees’ Retirement System (CalPERS) actuarial assumptions.

Budget Reform. Made major changes to create a stronger “rainy day fund” for California:

• Made the existing Proposition 58 rainy day fund larger and made it harder to suspend an annual contribution. Increased the maximum size of the state rainy day fund from 5% to 10% of General Fund revenue. Required the State to always make the 3% payments into the rainy day fund, except in years when the State has a deficit big enough to start using the rainy day funding. Allowed half of the annual payment into the rainy day fund to be used for one-time infrastructure and debt service.

• Restricted the use of the funds in the rainy day fund to rainy days. Funds can be used to cover a budget shortfall – up to the previous year’s expenditures adjusted for inflation and population growth. Included a “50-25-25 regulator” provision that prevents using all of the rainy day funds in one year. If the rainy day fund exceeds 10% of General Fund Revenue, annual payments to the fund stop and any excess funding can be used for one-time purposes, as specified.

• Captured “unanticipated revenue” for additional rainy day fund contributions. The Department of Finance created a projection of expected revenue based on the state’s last 20 years of revenue performance. Any revenue that is received above that trend line is “unanticipated” and must be put in the rainy day fund. Any new revenue that is needed to meet our Proposition 98 obligation is excluded, so Proposition 98 is fully funded without encroaching on funding for other programs.

Listed below are the measures which were part of the 2010-11 State Budget:

SB 870 Chapter 712 2010-11 Budget Bill

AB 1610 Chapter 724 Education finance (trailer bill)

AB 1612 Chapter 725 Human services (trailer bill)

AB 1619 Chapter 732 Elections (trailer bill)

AB 1620 Chapter 726 Public works projects (trailer bill)

AB 1621 Chapter 727 Financial Information System for California (FI$CAL) (trailer bill)

AB 1624 Chapter 713 Cash management (trailer bill)

AB 1628 Chapter 729 Public safety (trailer bill)

AB 1629 Chapter 730 Dept. of Developmental Svcs: Bay Area housing financing (trailer bill)

AB 1632 Chapter 731 Economic development (trailer bill)

SB 849 Chapter 628 Budget Act of 2009: augmentation (Ducheny) (deficiency bill)

SB 851 Chapter 715 Education finance: Proposition 98: suspension (trailer bill)

SB 853 Chapter 717 Health (trailer bill)

SB 855 Chapter 718 Resources (trailer bill)

SB 856 Chapter 719 General government (trailer bill)

SB 857 Chapter 720 Judicial (trailer bill)

SB 858 Chapter 721 Revenues (trailer bill)

Other related bills:

AB 342 Chapter 723 Medi-Cal: demonstration project waivers (Perez)

AB 1625 Chapter 728 Public employment: collective bargaining (Perez)

AB 10 X6 Chapter 1 (6X) Service and volunteering (Blumenfield)

SB 208 Chapter 714 Medi-Cal (Steinberg)

SB 524 Chapter 716 Transportation funds (Cogdill)

SB 847 Chapter 162 Education finance: federal funds (Steinberg)

SB 863 Chapter 722 Local government: Redevelopment and Williamson Act

SB 866 Vetoed Local government mandate securitization

SB 867 Chapter 733 CalPERS transparency (Hollingsworth)

SB 22 X6 Chapter 3 (6X) Pension reform (Hollingsworth)

ACA 4 Res. Ch. 174 Budget reform (Gatto)

At the November 2010 General Election, Proposition 25 was passed by the voters which changes the vote requirement to pass a budget and the budget-related legislation from a 2/3 vote to a simple majority. The Legislature still needs a 2/3 supermajority to approve taxes. The Proposition also specifies that in any year when the Legislature has not sent a Budget Bill to the Governor by June 15, this measure would prohibit Members of the Legislature from collecting any salary or reimbursements for travel or living expenses. This prohibition would be in effect from June 15 until the day that a budget is presented to the Governor. These salaries and expenses could not be paid to legislators at a later date.

It is hoped that with the passage of this Proposition, that the delay in passing future budgets will be forestalled.

At the time of the writing, the LAO indicated that the budget shortfall for 2011-12 would be $25.4 billion, twice as large as legislative leaders predicted and could face deficits of $20 billion through 2015-16. The federal assistance of $5.4 billion that was anticipated to balance the 2010-11 Budget will only amount to about $1.9 billion meaning that cuts will have to be made to the current year’s budget. Voters also passed two propositions that could restrict the budget process: (1) prohibiting the taking of funds from local government accounts; and (2) passing fees or certain tax measures by a 2/3 vote. Governor Schwarzenegger, on November 19, 2010, indicated he was going to call a special session on December 6th, when the new Legislature is sworn in, to deal with the $6.1 billion shortfall in the 2010-11 Budget.